5 Del. Admin. Code § 2108/2209-6.0

Current through Register Vol. 28, No. 7, January 1, 2025

Section 2108/2209-6.0 - Consumer Protection Principles

6.1 Fundamental consumer protection principles relevant to the underwriting and marketing of mortgage loans include:

6.1.1 Approving loans based on the borrower's ability to repay the loan according to its terms; and

6.1.2 Providing information that enables consumers to understand material terms, costs, and risks of loan products at a time that will help the consumer select a product.

6.2 Communications with consumers, including advertisements, oral statements, and promotional materials, should provide clear and balanced information about the relative benefits and risks of the products. This information should be provided in a timely manner to assist consumers in the product selection process, not just upon submission of an application or at consummation of the loan. Providers should not use such communications to steer consumers to these products to the exclusion of other products offered by the provider for which the consumer may qualify.

6.3 Information provided to consumers should clearly explain the risk of payment shock and the ramifications of prepayment penalties, balloon payments, and the lack of escrow for taxes and insurance, as necessary. The applicability of prepayment penalties should not exceed the initial reset period. In general, borrowers should be provided a reasonable period of time (typically at least 60 days prior to the reset date) to refinance without penalty.

6.4 Similarly, if borrowers do not understand that their monthly mortgage payments do not include taxes and insurance, and they have not budgeted for these essential homeownership expenses, they may be faced with the need for significant additional funds on short notice.¹²Therefore, mortgage product descriptions and advertisements should provide clear, detailed information about the costs, terms, features, and risks of the loan to the borrower. Consumers should be informed of:

6.4.1 Payment Shock. Potential payment increases, including how the new payment will be calculated when the introductory fixed rate expires.¹³

6.4.2 Prepayment Penalties. The existence of any prepayment penalty, how it will be calculated, and when it may be imposed.

6.4.3 Balloon Payments. The existence of any balloon payment.

6.4.4 Cost of Reduced Documentation Loans. Whether there is a pricing premium attached to a reduced documentation or stated income loan program.

6.4.5 Responsibility for Taxes and Insurance. The requirement to make payments for real estate taxes and insurance in addition to their loan payments, if not escrowed, and the fact that taxes and insurance costs can be substantial.

^{12 Providers generally can address these concerns most directly by requiring borrowers to escrow funds for real estate taxes and insurance.}

^{13 To illustrate: a borrower earning $42,000 per year obtains a $200,000 "2/28" mortgage loan. The loan's two-year introductory fixed interest rate of 7% requires a principal and interest payment of $1,331. Escrowing $200 per month for taxes and insurance results in a total monthly payment of $1,531 ($1,331 + $200), representing a 44% DTI ratio. A fully indexed interest rate of 11.5% (based on a six-month LIBOR index rate of 5.5% plus a 6% margin) would cause the borrower's principal and interest payment to increase to $1,956. The adjusted total monthly payment of $2,156 ($1,956 + $200 for taxes and insurance) represents a 41% increase in the payment amount and results in a 62% DTI ratio.}

5 Del. Admin. Code § 2108/2209-6.0